Confirmation Bias: How We Only See What We Already Believe

This is confirmation bias, and it is the silent killer of investment portfolios.

What Confirmation Bias Is#

Confirmation bias is the tendency to search for, interpret, favour, and recall information in a way that confirms pre-existing beliefs.^¹ It operates at every stage of information processing:

Search: We seek out sources likely to agree with us.
Interpretation: We interpret ambiguous information as supporting our view.
Recall: We remember confirming evidence better than disconfirming evidence.

The research on confirmation bias is extensive and consistent. In a classic study, participants who believed or disbelieved in capital punishment were shown the same mixed evidence. Both groups reported that the evidence supported their original position.^² People do not just ignore disconfirming evidence - they actively reinterpret it to fit their existing beliefs.

How Confirmation Bias Affects Investing#

Building Conviction Without Balance#

When researching an investment, confirmation bias leads investors to seek out bullish analysis if they are already inclined to buy, or bearish analysis if they are inclined to avoid. The research process becomes an exercise in validation rather than genuine inquiry.

An investor excited about a technology company might read the company's investor presentations, enthusiastic analyst reports, and fan forums. They are less likely to seek out critical analyses, short-seller reports, or discussions of competitive threats.

Ignoring Warning Signs#

Once invested, confirmation bias makes it difficult to recognise when the thesis is breaking down. Early warning signs (declining margins, customer complaints, executive departures) are dismissed as temporary or irrelevant, while any positive development is amplified.

This is how investors end up holding collapsing companies all the way down, convinced at each stage that the market is wrong and they are right.

Overconcentration#

Confirmation bias feeds portfolio concentration. The more confident you become in an investment, the more you want to own of it. And the more you own, the more motivated you are to find confirming evidence. This creates a feedback loop that can result in dangerous overexposure to a single position.

Echo Chambers#

Modern information environments amplify confirmation bias. Social media algorithms show you content similar to what you have engaged with before. Investment forums attract like-minded believers. YouTube recommends videos that match your viewing history.

It is now possible to construct an entire information diet that never challenges your investment beliefs. This feels comfortable but is analytically dangerous.

Why Confirmation Bias Is So Powerful#

Confirmation bias persists because it serves psychological needs:

Cognitive Efficiency#

Processing information that conflicts with existing beliefs is mentally effortful. Confirming information slides smoothly into existing mental models. Disconfirming information requires restructuring those models, which is hard work.^³

Identity Protection#

Investment beliefs often become tied to identity. Admitting an investment thesis was wrong can feel like admitting personal failure. Confirmation bias protects the ego by filtering out evidence that would require uncomfortable self-revision.

Consistency Seeking#

Humans have a deep need for consistency between beliefs and actions.^⁴ Once you have bought an investment, admitting doubts creates psychological dissonance. Confirmation bias reduces this dissonance by suppressing the doubts.

Sunk Cost Amplification#

The more time, money, and emotional energy invested in a position, the more painful it is to acknowledge evidence against it. Confirmation bias intensifies with investment size.

Evidence-Based Strategies to Counter Confirmation Bias#

1. Actively Seek Disconfirming Evidence#

Make it a deliberate practice to search for the best arguments against your position.^⁵ If you are bullish on an investment, read the most thoughtful bearish analyses you can find. If you are bearish, read the bullish case.

The goal is not to change your mind automatically, but to ensure you have genuinely engaged with the counter-arguments rather than dismissed them without consideration.

Practical approaches:

Search "[company name] bear case" or "[investment] risks"
Read short-seller reports (they are often biased, but their concerns deserve consideration)
Find the smartest person who disagrees with you and understand their reasoning

2. Pre-Mortem Analysis#

Before making an investment, imagine it has failed spectacularly. Then work backwards to identify what could have caused that failure.^⁶

This technique, developed by psychologist Gary Klein, forces you to generate reasons the investment might not work out - reasons your confirming brain would otherwise filter away.

Example pre-mortem questions:

"It is one year from now and this investment has lost 50%. What happened?"
"What would have to be true for this to be a terrible decision?"
"What are the three most likely ways this could go wrong?"

3. Devil's Advocate Process#

Assign someone (or yourself, in a dedicated session) to argue against the investment. The key is that the devil's advocate must make the strongest possible case against, not a straw man easily dismissed.^⁷

For individual investors without a team, this can mean:

Writing out the bear case in full before making a decision
Waiting 48 hours between completing bullish research and making a purchase, using that time to find and engage with bearish views
Discussing the investment with someone who tends to be skeptical

4. Establish Disconfirming Criteria in Advance#

Before investing, write down what would disprove your thesis.^⁸ Be specific:

"If revenue growth falls below 10% for two consecutive quarters, my thesis is wrong."
"If the CEO leaves, I will reassess regardless of stated reasons."
"If margins decline below 15%, the competitive advantage I believed in may not exist."

These pre-commitments make it harder to rationalise away disconfirming evidence when it appears. The criteria were set when you were thinking clearly, not when you are emotionally invested.

5. Diversify Information Sources#

Deliberately consume information from sources with different perspectives. If you typically read growth investor blogs, also read value investor analysis. If you follow technology enthusiasts, also follow technology skeptics.

This does not mean giving equal weight to all opinions. It means ensuring your information diet includes genuine diversity rather than multiple sources saying the same thing.

6. Scheduled Reassessment#

Set calendar reminders to reassess each investment with fresh eyes, ignoring your purchase price and original thesis. The question is: "Based only on what I know today, would I buy this investment?"

During reassessment, actively search for reasons to sell, not just reasons to hold. This counteracts the default bias toward confirming the existing position.

7. Track Predictions and Outcomes#

Keep a decision journal documenting your investment reasoning and predictions.^⁹ Periodically review past entries to see how accurate your assessments were.

This creates accountability and makes confirmation bias visible over time. Patterns of overconfidence or selective attention become apparent when you track outcomes against predictions.

Confirmation Bias in Practice: Warning Signs#

You may be affected by confirmation bias if:

You only follow analysts and commentators who share your view
Negative news about your holdings makes you defensive rather than curious
You can articulate the bull case for your investments better than the bear case
You have never changed your mind about an investment based on new information
Your research process feels more like building a case than genuine inquiry
You feel personally attacked when someone criticises your investments

The Limits of Debiasing#

Complete elimination of confirmation bias is probably impossible. It is a fundamental feature of human cognition, not a correctable error.^¹⁰

The realistic goal is to reduce its influence on major decisions:

Awareness helps but is not sufficient. Knowing about confirmation bias does not automatically prevent it.
Structured processes (pre-mortems, disconfirming criteria, devil's advocacy) work better than willpower alone.
Humility about certainty is protective. Holding views with appropriate uncertainty makes updating easier.

Summary#

Confirmation bias causes investors to seek, interpret, and remember information that supports their existing beliefs while filtering out contradictory evidence. This leads to building conviction without balance, ignoring warning signs, dangerous overconcentration, and information echo chambers. Evidence-based countermeasures include: actively seeking disconfirming evidence, conducting pre-mortem analyses (imagining failure and working backward), using devil's advocate processes, establishing disconfirming criteria before investing, diversifying information sources, scheduling regular reassessments, and tracking predictions against outcomes. The goal is not to eliminate confirmation bias but to build processes that reduce its influence on major decisions.

Sources#

Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2(2), 175-220. https://doi.org/10.1037/1089-2680.2.2.175

Lord, C. G., Ross, L., & Lepper, M. R. (1979). Biased assimilation and attitude polarization: The effects of prior theories on subsequently considered evidence. Journal of Personality and Social Psychology, 37(11), 2098-2109. https://doi.org/10.1037/0022-3514.37.11.2098

Klayman, J. (1995). Varieties of confirmation bias. Psychology of Learning and Motivation, 32, 385-418. https://doi.org/10.1016/S0079-7421(08)60315-1

Festinger, L. (1957). A Theory of Cognitive Dissonance. Stanford University Press.

Klayman, J., & Ha, Y. W. (1987). Confirmation, disconfirmation, and information in hypothesis testing. Psychological Review, 94(2), 211-228. https://doi.org/10.1037/0033-295X.94.2.211

Klein, G. (2007). Performing a project premortem. Harvard Business Review, 85(9), 18-19.

Schwenk, C. R. (1990). Effects of devil's advocacy and dialectical inquiry on decision making: A meta-analysis. Organizational Behavior and Human Decision Processes, 47(1), 161-176. https://doi.org/10.1016/0749-5978(90)90051-A

Popper, K. (1959). The Logic of Scientific Discovery. Routledge.

Richards, C. (2012). The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. Portfolio.

Pronin, E., Lin, D. Y., & Ross, L. (2002). The bias blind spot: Perceptions of bias in self versus others. Personality and Social Psychology Bulletin, 28(3), 369-381. https://doi.org/10.1177/0146167202286008